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TAX: Focus on Regulation & Compliance By Intl Tax Authorities


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“As investment in Africa continues to increase there will be a significant debate by the authorities on the best tax system and collection mechanism,” says PwC Global Tax Services Networks Leader.

Globally companies can expect the tax authorities to toughen up their enforcement measures and focus on compliance levels as the economy emerges from the recent economic uncertainty, says Professional Services Firm PwC.

“Certain policies, such as transfer pricing, are key potential growth areas for governments around the world to increase their revenues, and this is more particularly true in the emerging markets as they are in the process of developing tax systems,” says Frits Litjens, PwC Global Tax Service Networks Leader.

Discussions between PwC Tax Services and multinational companies suggest that transfer pricing will in the next five years be the single most significant tax risk facing them while doing business in Africa, says Litjens. Litjens, who is based in the Netherlands, is in South Africa this week on a business visit.

Transfer pricing is the price at which transactions between units of a multinational firm take place, including intercompany transfer of goods, property, services and loans. Without regulation, pricing may be used to shift profits between countries. Companies are required to comply with the pricing rules, and also to thoroughly document inter-company transactions. The laws affect South African taxpayers with offshore operations such as foreign subsidiaries and holding companies. In Africa countries such as South Africa, Tanzania, Namibia, Kenya and Mozambique have introduced transfer pricing legislation. Other jurisdictions tax multinational companiesÂ’ under the anti-avoidance provisions of their domestic tax laws. Litjens says that transfer pricing and thin capitalisation is increasingly becoming a risk area for companies as a result of an increase in audit activity from the authorities.

Companies Must Play By the Rules So as Not to Be Caught Out

“Companies need to ensure they adequately prepare transfer pricing documentation on a co-ordinated basis. It is vital for companies to keep documentation of cross-border transactions within the organisation,” he warns. “But likewise, it is equally important that governments play by the internationally accepted rules when assessing transfer pricing.”
Litjens says that CEOs and directors are grappling with a raft of tax issues in the wake of rapid legislative change and increased scrutiny from governments, tax authorities, the media and other interested stakeholders. He says that the vast change in tax legislation across the world has also cost multinationals significant expenses, time and effort. “Unfortunately some of these multinational companies’ tax strategies have also been highlighted negatively in the media.”

The efforts of governments to improve compliance and tax collection have placed extensive pressure on companies to put risk management high on the agenda, he says.”There is a clear need for transparency in tax matters and tax needs to be elevated on the corporate governance agenda in order to manage these risks effectively.”

Paul de Chalain, Head of PwC Tax, Southern Africa says: “Although tax issues are debated at some level by the board, they are clearly not being given the degree of importance they deserve. By establishing tax at the heart of a company’s strategic agenda, it will be able to operate effectively in difficult economic circumstances, particularly when increasing demands are made on an organisation by the government to be tax compliant.”While in South Africa, the King 3 Code on Corporate Governance does not address the issue of tax directly, its requirements are designed to facilitate risk management including tax risks.Mervyn King, chairman of the King Committee, has pointed out that accountability and transparency of the board are paramount.

Litjens says globally there is also a focus by the tax authorities to enhance the exchange of information on a cross border basis. Governments aim to narrow the tax gap, improve the rate of tax compliance and further reduce the amount of lost revenue, he explains. “One of the causes of the financial crisis can be traced back to the loss of information.” Countries, such as South Africa, are obliged to provide information on request to other jurisdictions with which they have a double-taxation agreement. The Organisation for Economic Co-operation and Development (OECD) recently announced a peer review process on the exchange of information. The Group of 20 (G20) leaders have also called for greater tax transparency and more exchange of information.

Tax Collections Continue to Add to MultinationalsÂ’ Tension

With tax collections high up on the agenda of most governments following the global economic recession, it is not surprising then that many multinationals are feeling strained, says Litjens. Undoubtedly the private sector plays an essential role in contributing to economic growth and prosperity including the paying and generating of taxes. However, the financial crisis has damaged the reputation of many multinationals, he says. There is an increasing demand on multinationals to pay more tax, particularly in the developing countries.

As a result of the crisis, the business community across the world has embarked on a reform of corporate governance principles. One example is the Extractive Industries

Transparency Initiative (EITI), directing companies to publish what they pay and for governments to disclose what they receive.

He says that governments will continue to struggle with what is the best method for tax collection, especially in the emerging markets. The authorities are making use of more technology in collecting tax. Litjens says that the move to electronic filing by many countries, including South Africa, is extremely beneficial in that it reduces the amount of paperwork, and allows for a more targeted and risk-based approach to audit and compliance, and can also help eliminate fraudulent activity.

He says that as investment in Africa continues to increase there will be a significant debate by the authorities on the best tax system and collection mechanism. “The effect that tax systems have on companies is important and governments should continue to develop tax systems which foster business, investment and growth.”

Africa is currently represented in the top ten of the worldÂ’s fastest growing economies for the next five years, according to the Economist and IMF.

Litjens says that tax systems should not pose a barrier to this growth as the contribution by way of taxes from these investors to the economy is substantial. For instance, South AfricaÂ’s large companies contributed R140,76 billion in taxes to the economy and employed an annual equivalent of 638,300 staff in 2010, according to PwCÂ’s Total Tax Contribution Survey.

De Chalain says that the debate and administration of ensuing tax systems in Africa will be influenced by the African Tax Administration Forum (ATAF), which has been implemented to transform tax regulation in Africa in the next decade.

Suresh Kana, CEO of PwC Southern Africa, says: “Africa is an important frontier for economic growth. We believe the regional economy could double by 2020 to nearly US$3 trillion and we are getting a clear signal from our international clients that Africa is an increasingly important market for them.”

Kana says that internationally the availability of key skills is a concern for many industries, such as tax. PwC recently unveiled a plan to invest in additional skills and business infrastructure in firms across the African continent. “The majority of our investment will go towards recruiting additional skills across our assurance, tax and advisory businesses,” he says.


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